Existing guidelines and their limitations

Chapter XB of the ICDR Regulations provides for issuance of specified securities by SMEs. According to these guidelines, an SME is waived from the condition of filing a draft offer document with SEBI. Also, SEBI will not issue any observations on the offer document submitted. Though, criteria which were otherwise applicable for listing of companies on the SME exchange, like minimum net worth, profitability and tangible assets, etc., were waived, onerous conditions such as requirement for promoters to dilute 25% of their stake, compulsory market making for three years and underwriting 100% of the issue, with the merchant banker himself underwriting directly up to 15% of issue size still remain. These factors discouraged the issuers from going public on the SME exchange, considering the cost of issuance, minimum track record requirements, profitability requirements, etc.

Introduction of the new guidelines

SMEs form the backbone of the Indian Economy. Considering the role of SMEs in nation building and their potential in terms of generating employment and income as well as fostering innovation and enterprise, it seemed imperative that necessary enabling environment was provided for these enterprises to flourish.  Hence, the Finance Minister in his budget speech on Feb 28, 2013 announced that “Small and Medium Enterprises (SMEs), including start-up companies, will be permitted to list on the SME exchange without being required to make an initial public offer (IPO), but the participation will be restricted to informed investors. This will be in addition to the existing SME platform in which listing can be done through an IPO and with wider investor participation”.  Pursuant to this, SEBI has come up with a guideline in Chapter XC of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 on such Listing of SMEs on ITP without an IPO.

Eligibility for an SME to list its securities on ITP without an IPO

Only a company which shall fulfil the following conditions, shall be eligible to get its securities listed on the ITP of the SME Exchange

• The company, its promoters, group companies or directors do not appear on the wilful defaulters’ list of RBI as maintained by CIBIL;
• No winding up petition has been admitted against the company by a competent court;
• Within a period of 5 years prior to the date of application for listing,
  • The company, group companies or subsidiaries have not been referred to BIFR
  • No regulatory action has been taken against the company, its promoters or directors by SEBI, RBI, IRDA or MCA;
• The company has not been in existence for more than 10 years.
• Revenues in any of the previous financial years <= Rs 100 crore.
• Paid-up capital in any of the previous financial years <= Rs 25 crore.
• At the time of making the listing application, the company has at least 1 full year’s audited financial statement for the immediately preceding financial year;
• Any one of the following criteria is fulfilled
  • At least one of the following have invested a minimum amount of Rs 50,00,000/- [The securities in which the parties as mentioned in last two sub-points of this point (securities purchased by a registered merchant banker or a qualified institutional buyer) have invested will be locked in for a period of 3 years from the date of listing.]
    • Alternative investment fund, venture capital fund or other category of investors/ lenders approved by SEBI, or
    • Angel investor who is a member of an association/ group which fulfils the criteria laid down by the Recognized Stock Exchange, through such association/ group, or
    • A registered merchant banker after exercising due diligence, or
    • A qualified institutional buyer, or
  • The company has received finance from a scheduled bank for its project financing or working capital requirements and a period of 3 years has elapsed from the date of such financing and the funds so received have been fully utilized, or,
  • A specialized international multilateral agency or domestic agency or a public financial institution has invested in the equity capital of the company.

Process of Listing

• The company that fulfils the above eligibility criteria may apply to a recognized stock exchange for listing of its specified securities on the institutional trading platform.
• Along with the application to a recognised stock exchange, the eligible SME proposing to list on the ITP shall also be required to file an information document containing certain specific disclosures relating to, inter alia, description of business, financial information, capital structure, assets and properties, risk factors, security ownership of beneficial owners and management, details of directors, executive officers and promoters, related party transactions and legal proceedings.
• Such information document shall be made public by hosting it on the website of the recognized stock exchange for a period of at least 21 days from the date of its filing.
• The recognized stock exchange may give an in-principle approval and after satisfying itself that the company is compliant of the guidelines, it may list the company’s securities on the ITP.

Restrictions after listing

• Listing of specified securities on the ITP cannot be accompanied by any issue of securities to the public in any manner.
• SME cannot undertake an IPO while its specified securities are listed on the ITP.
• The SME listed on ITP may raise capital through private placement or rights issue without an option for renunciation of rights.
  • The private placement shall be subject to the following:
    • SME shall procure an in-principle approval from the recognised stock exchange prior to the private placement,
    • Approval of shareholders by special resolution,
    • Allotment of securities should be completed within 2 months of obtaining such approval,
    • The explanatory statement to the notice to shareholders shall include certain disclosures,
    • The disclosures made in explanatory statement to the notice to shareholders shall be made available to the recognized stock exchange for dissemination at least 15 days prior to the shareholder’s meeting where the approval is sought,
    • Price of securities issued through private placement shall not be less than higher of the following
      • Book value of equity shares as per its last audited financial statement which is not older than 6 months,
      • Value of shares as determined by the report of an independent auditor or a registered merchant banker
  • The right issue shall be subject to the following
    • There shall not be an option for renunciation of right,
    • SME shall procure an in-principle approval from the recognised stock exchange prior to the right issue
  • The promoters shall hold 20% or more of the post listing capital and such capital shall be locked-in for a period of 3 years from the date of listing,
  • All the securities listed on ITP shall be in dematerialized form,
  • The company shall have connectivity with at least 1 depository at all times,
  • Minimum trading lot on ITP shall be Rs 10,00,000/-.

Exit from ITP

• Voluntary Exit: SME listed on the ITP may exit from it if
  • its shareholders approve such exit through a special resolution with 90% of total votes and the majority of non-promoter votes in favour of such proposal; and
  • the recognised stock exchange where its shares are listed approves such exit.

• Compulsory Exit: SME listed on the ITP shall exit from it if:
  • The specified securities have been listed on ITP for a period of ten years;
  • SME has paid-up capital of more than Rs 25 crore;
  • As per the last audited financial statement, SME has revenue of more than Rs 300 crore; or
  • SME has market capitalization of more than Rs 500 crore.

However, the stock exchange may grant 18 months’ time to the SME to delist from the platform on occurrence of the above events.

• Compulsory delisting with permanent removal from ITP.
  • Under the following circumstances, the company shall be delisted and permanently removed from the ITP
    • Company has failed to file its periodic filings with the recognized stock exchange for more than 1 year; or
    • Company has failed to comply with corporate governance norm(s) for more than 1 year; or
    • Non-compliance of the condition of listing as may be specified by the recognized stock exchange.
  • In case the company is delisted due to the reasons listed in point 3, no company promoted by the promoters and directors (other than independent directors) of such delisted company shall be permitted to be listed in ITP for a period of 5 years from such delisting.

Non-applicability of Takeover Code and Delisting Regulations

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) and the SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”) have been amended to the effect that they shall not apply to a company listed on the ITP of a recognised stock exchange.

Conclusion

It seems that these Regulations, by providing higher visibility and wider reach to the SMEs, will result in providing the necessary boost to the SMEs seeking capital. The promoters will be facilitated in diluting lower stake to informed investors, hence conserving the value for the growth stage. With more SMEs taking benefit of these regulations, listing will not only result in robust corporate governance, internal controls and systems for the SME, but will also prepare them for wider fund raising in future.

On the other hand, these regulations will provide a better portfolio churn and liquidity to the VCs, PEs and Risk Investors investing in such SMEs. It will also make the monitoring of their portfolios easier due to benefits of disclosure and compliance requirements of a regulated platform. Investing in listed SMEs will prove to be beneficial to investors, also from income tax point of view due to no capital gains on sale of listed shares (only STT payable).

Apart from this, as the mode of exiting from the ITP is relatively simplified, the migration to the main exchange would possibly be much smoother for a company whose specified securities are listed on the ITP of a recognised stock exchange.